How many times have you heard the term ’’balance sheet’’?
Whether you work in accounting or a different profession, the first impression is probably that we’re talking about a corporate report.
However, when it comes to the wealth management of one individual, the individual should have a balance sheet.
It is impossible to manage your finances if you don’t have an overview of your assets and liabilities.
A personal balance sheet tells you exactly how many assets you have on a given day, how many liabilities, and lastly, the net worth of your assets.
It’s a paradox for companies to have their balance sheets, and for us, as individuals, not to have them. Or, to have them in a form that prevents us from observing our financial situation from the right angle.
Here you can download an excel model of a Personal Balance Sheet.
Besides the cross-section of the balance on the current day, there are also columns for asset and liability planning for the future.
For example, the current state has the date of June 30th, and the planned state is on September 30th.
This way, you can track your accomplishments compared to the plan.
The Content of a Personal Balance Sheet
The balance sheet is made according to the principle of decreasing liquidity.
Hence, the liquid assets are listed first, and the less liquid ones are listed after.
For example, cash is liquid, as it’s already in monetary form, as well as shares that are being used for stock market exchanges, as they can be sold easily.
Cash and equivalents
This item applies to cash in banks and its equivalents like cheques.
Shares for trading
This item refers to the shares traded on the stock exchange. They are highly liquid assets, as they can be cashed out through your broker in a few days.
This item refers to the loans you have given to your debtors.
This item is related to your real estate. It includes apartments, suites, garages, land, etc.
To get the real picture you need to evaluate the worth of your realties.
This item relates to cars, vehicles, etc.
This item refers to the value of shares in your or another company. You shouldn’t confuse it with shares for trading. This asset is low liquid.
When it comes to liabilities, you should usually fill in bank loans or similar long-term loans.
You shouldn’t enter debts for monthly bills unless they are significant items.
Net assets are the difference between assets and liabilities and represent your equity.
Optimal Asset Structure
In the end, the way your assets are structured is very important.
It is significant due to risk distribution.
Usually, highly liquid assets have a lower yield. Yet, those assets could lose value over time.
For example, cash loses value. Hence, it isn’t good for cash to represent over 30% of your total assets.
Here is an example of an asset distribution of $2mil. It doesn’t represent our recommendation, but serves as an explanation of the concept of risk diversification:
Cash: 20% – $400k
Properties: 50% – $1m
Cars: 5% – $100k
Shares 10% – $200k
Digital assets 1% – $20k
Other – 14%